More Evidence of a Slowing Chinese Economy

Ambrose Evans-Pritchard, at The Telegraph, takes note of some economic data from China that seems to contradict the Chinese government's overall reports of economic growth. (Link here). Mr. Evans-Pritchard indicates in his article that China's imports from Japan and Taiwan in December fell 16.2% and 6.2%, respectively; the Shanghai Container Freight Index fell 1.4% in November, and had been sliding for several months prior; and the Baltic Dry Index (freight rates for ores, grains, and bulk goods) fell 44%, with weak Chinese demand for iron ore being the key culprit. (The author cautions that the BDI index reflects the shipping glut, so the figure may need to be taken with a grain of salt).

However, rail, road, river and air freight volume for the whole of China fell to 31780m tons in November (latest data), from 32340m tons in October. Not a big fall, but still negative. (National Bureau of Statistics of China.)

Chinese electricity use was flat in over the Autumn, with a sharp fall in the (year-on-year) growth rates from 8.9pc in September, to 8pc in October, and 7.7pc in December.

Residential investment has been contracting on a monthly basis, and of course property prices are now falling in all but two of China’s 70 largest cities.

So how did China pull off an economic growth rate of 8.9pc in the fourth quarter?

Beats me.

I strongly suspect that the trade and power data reveal the true state of China’s economy.

There clearly was a pick up in early January but I stick to my view that China has inflated its credit bubble beyond the limits of safety – an increase of 100pc of GDP in five years, or twice US credit growth from 2002-2007 – and that Beijing cannot continue to gain much traction with this sort of artificial stimulus.

Indeed, the extra boost to GDP from each extra yuan of credit has collapsed, according to Fitch Ratings.

A final point. There is a widespread misunderstanding that China’s households can easily come to the rescue by cranking up spending because they have the world’s highest savings rate, and consumption is just 36pc of GDP.

Prof Michael Pettis from Beijing University puts that one to rest. The Chinese do not have a much higher personal savings rate than other East Asians. The reason why consumption is so low is that wages are low, the worker share of GDP is low, and the whole economy is massively deformed and tilted towards excess investment.

This is deeply structural. It cannot be changed with a flick of the fingers, and contains the seeds of its own destruction.

One of the primary concerns of the Chinese government is social unrest due to a slowing economy (Heaven help them if their economy were to actually contract). Thus, the recent efforts to reign in media and television programs that might raise the average Chinese expectations as to how well they should be living. (Somewhat ironic that, in a Communist nation, there is such a huge disparity in incomes and how people live). My question is, what happens to the U.S., or U.S. companies, if there is enough social unrest to interfere with production or shipment of goods to U.S. markets, and the stores shelves are empty of I-Phones, cheap clothes, shoes, etc.?